estate planning organizer
2010 And Beyond: Estate Planning In An Uncertain Tax Environment (The Impact Of Estate Tax Repeal)
The federal estate tax was repealed for a one-year period beginning January 1, 2010. It is slated to return in 2011 at the rules in effect before the 2001 Tax Act: 55% estate tax rate on inherited wealth over $1M ($2M for married couples, if planned properly). For 2009, the estate tax rate was 45% on all wealth above $3.5M ($7M for married couples, if planned properly).
Many expected the 2009 rules to be extended to 2010 and possibly thereafter. In fact, Congress could still extend the 2009 rules by changing the rules mid-year or retroactive to January 1, 2010. Any retroactive change will raise issues of constitutionality and likely cause litigation for years to come.
The 2010 year estate tax repeal will not necessarily be beneficial for estates of many taxpayers dying in 2010. In conjunction with the repeal of the estate tax, beneficiaries inheriting assets from an estate of a person dying in 2010 will take a “carryover basis” in the asset equal to the basis the decedent had in that asset rather than a “stepped up basis” equal to the value on the date of death. Upon a subsequent sale of the appreciated asset, the beneficiary will pay income tax on the sale value less the carryover basis. There are two adjustments to the new carryover basis rule: The basis of appreciated property owned by the decedent may be increased by up to $1.3M (but to not more than the fair market value of the assets) as well as by certain loss carryovers. Secondly, in addition to the first adjustment, property passing to a surviving spouse (whether outright or in a certain qualified trust for the spouse) can qualify for up to a $3M increase in basis. In both cases, the basis adjustment is allocated among the assets by the executor of the estate.
So, for the estate of a person dying in 2010, rather than being liable for estate taxes, the estate and its beneficiaries may end up being liable for higher income taxes instead, due to the imposition of the carryover basis rules.
There will be numerous challenges to handling the estates of persons dying in 2010, as well as to preparing estate plans for clients for a future which is so uncertain. For estate planning clients, we will want to establish estate planning documents and asset structures which consider the 2009 and 2011 estate tax rules, as well as the 2010 carryover basis rules, in case the client dies in 2010. The key will be to organize an estate plan that considers all the potential scenarios and provides the executor with the authority and ability to make various elections and choices at the death of the client, when we will know the values and basis of the assets, and hopefully, the rules that apply.
For instance, in the case of a married couple with appreciated assets, we will want to ensure that the spouse who dies first has a Will that creates a trust for the surviving spouse that qualifies for a potential step up in the basis of the assets, yet at the same time ensures if or when the estate tax is back in place, that the trust assets qualify for estate tax exclusion on the death of the surviving spouse.
With the uncertainties of the current estate tax and carryover basis rules, we recommend that you arrange for a careful review of your current estate plan to make sure the plan addresses all the different scenarios that could be applicable, and provides your executor with all the available options and opportunities for saving estate and income taxes.
About the Author
Please visit www.lacykatzen.com or contact Karen Schaefer, Esq. at (585) 324-5718 or kschaefer@lacykatzen.com
Get Your House in Order Family Organizer & Household Planner
Hydrofracked? One Man’s Mystery Leads to a Backlash Against Natural Gas Drilling
There are few things a family needs to survive more than fresh drinking water. And Louis Meeks, a burly, jowled Vietnam War hero who had long ago planted his roots on these sparse eastern Wyoming grasslands, was drilling a new well in search of it. The drill bit spun, whining against the alluvial mud and rock that folds beneath the Wind River Range foothills. It ploughed to 160 feet, but the …